A key question that comes to mind for property investors who are starting a ‘Buy To Let’ business is whether they should own the property in their personal name or in a limited company.

While buying a property in a limited company is more tax efficient than buying personally, other costs determine how much profit you will make. The mortgage will usually be your highest cost personally, so it makes sense to keep it as low as possible.

The ‘Property Guru’s’ of the internet claim that everyone should be using a limited company because of the dreaded Section 24 mortgage cost restrictions.

However, this all depends on your individual circumstances and unfortunately there isn’t a one size fits all answer to this.

Let’s first start by understanding the implications of Section 24.

Property investor looking at properties

What are the implications of section 24? 

Section 24 was gradually introduced from 6th April 2017. Section 24 is where Landlords holding property in their personal name were no longer able to deduct the full cost of mortgage interest from their rental income. Instead, a 20% tax credit is available to deduct from their final income tax liability.

For a higher rate taxpayer who pay 40% tax on their rental profits, they effectively are only getting half of their mortgage interest deducted from their rental profits.

This is still obviously a kick in the teeth to Landlords, but also isn’t as bad as the ‘Property Guru’s’ make it out to be.

Then when we look at a basic rate taxpayer who pays only 20% tax on their rental profits. They effectively are still getting the full cost of their mortgage interest to deduct from their rental profits.

Now we have a good understanding of the implications of section 24, let’s review some other factors to assess whether a limited company might be right option for you.

Considerations if putting a property in your personal name: 

  1. Tax free allowances available – Individuals get tax free allowances such as their personal allowance, CGT annual exemption, property income allowance and rent a room relief which aren’t available to companies.
  2. Transferring existing properties – If you already own properties in your personal name, you’ll have to pay capital gains tax on transferring the properties. The limited company may also have to pay stamp duty land tax on the purchase. These cashflow implications need to be factored in.
  3. Mortgage rates – You can usually expect to have slightly lower interest rates by owning the properties personally
  4. Full cash purchase – If you have enough cash to purchase a property outright without needing a mortgage, then Section 24 doesn’t apply to you.

Considerations if putting a property in a Limited Company 

  1. Section 24 – Mortgage cost restrictions only apply to individual landlords and not to limited companies, which means the full cost of mortgage interest can be deducted.
  2. Corporation tax – For profits between £50,000 and £250,000, a limited company will pay corporation tax effectively at 26.5% on both it’s rental profits and on the sale of properties held by the company.
  3. Retained profits – If you plan on reinvesting the profits created, using a limited company may save the overall amount of tax due to HMRC each year, allowing for more cash to be retained.
  4. Administrative burden – Setting up a limited company is fairly straight forward, however they do bring additional admin requirements with reporting with Companies House and HMRC which therefore usually increases your accountancy fees.
  5. Exit strategy – Before putting properties into a limited company, you need to consider your long term plan. If you plan to sell your properties, there may be additional tax to pay on extracting the cash proceeds from the limited company.

Need further help before you make a decision?

Using a limited company may be the right decision for you. It may not be.

In order to help you make a decision on the best structure for your properties, we can undertake a ‘Bespoke Tax Planning Review’ covering the following:

  • A detailed review of your current position
  • Understand your plans for the future
  • Consider the tax savings vs. cashflow implications of proposed changes made
  • Find a balance between tax savings vs. compliance cost of changing your tax structure
  • Design a bespoke report based on your circumstances
  • Meet with you to discuss the report and provide you with the peace of mind that there are no nasty surprises down the line

Get in touch now to find out more about this service, and for other property specialist advice with me.